U.S. Territories Self-Employment Tax — YouTube video text script

Hello, and welcome to today's webinar titled U.S. Territories - Self-Employment Tax. I see it's the top of the hour, and we're so glad you joined us today. My name is Christopher Green, and I am a Stakeholder Liaison with the Internal Revenue Service. I will be your moderator for today's webinar, which is slated for approximately 90 continuous minutes.

But before we begin, if there is anyone in the audience that is with the media, please send an email to the address on the slide. Please be sure to include your contact information and the news publication you're with. Our Media Relations and Stakeholder Liaison staff will assist you and answer any questions you may have. And as a reminder, this webinar will be recorded and made available for future viewing.

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This webinar offers one IRS continuing education credit or CE credit. You can earn one IRS CE credit and a related certificate of completion by attending the live broadcast of the webinar for at least 50 minutes after the official top of the hour start time and responding to at least three polling questions during this live broadcast. So audience, this polling question example to test your pop up blocker will count towards the polling question requirements to earn CE credit. And here we go.

How comfortable are you using IRS.gov to research tax information and/or resolve tax related issues? Are you, A, comfortable? B, neither comfortable nor uncomfortable? C, are you uncomfortable? D, do you rarely or never use IRS.gov? Now take a moment, click on the radio button that corresponds to your answer. How comfortable are you using IRS.gov to research tax information and/or resolve tax related issues?

I'll give you a few moments to make your selection now. Okay, folks, we're going to go ahead and stop the polling. Let's see how the majority of you have responded. And what I can see here is a majority of you actually responded, A, comfortable. And that's good. That's really good. Fair enough, folks. So if you did not receive the polling question and were not able to submit your answer, now is the time to check your pop up blocker to make sure you have it turned off, okay?

Now that we have concluded our administrative items, we can move along with our session. And again, welcome and thank you for joining us for today's webinar, U.S. Territories - Self-Employment Tax. You should note that this webinar is scheduled for 90 non-stop minutes from the top of the hour. And without further ado, let's meet our presenters.

Okay. Today we are joined by Senior Revenue Agents, Bethany Cross and Kathy Bishop, joining us from the Large Business and International Division, also known as LB&I, respectively. They are both technical specialists in the International Individual Compliance, also known as IIC, and are responsible for facilitating and coordinating the identification and development of issues on examination involving U.S. tax residency status and taxation of U.S. individuals living and/or working outside of the United States.

So first off, we have Bethany who previously worked numerous examinations as a revenue agent in LB&I IIC. Bethany has expertise in a variety of topics, including residency status, the Foreign Earned Income Exclusion, taxation of individuals with income from U.S. territories, and employees of foreign governments and international organizations. She has developed and presented numerous training courses and workshops presenting them within the IRS. Bethany also developed and presented courses on behalf of the IRS to external audiences. Bethany holds a Bachelor's of Science in Computer Science with a minor in Accounting and courses in Education.

Next, we have Kathy. Kathy has been with the IRS for 16 years. She previously worked numerous examinations as a revenue agent in the small business self-employed division, including international issues. Kathy has expertise in a variety of topics including residency status, the Foreign Earned Income Exclusion, taxation of individuals with income from U.S. territories, and employees of foreign governments and international organizations. Kathy holds a Bachelor's in Science with a minor in Computer Technology and a Master's of Science in Accounting and Taxation. Let's give a virtual welcome to Bethany and Kathy.

With that being said, I'll turn it over to you, Bethany, to kick off our presentation.

Well, thank you, Chris. And I want to add my welcome as well to everyone who's attending today. Thank you. During our webinar today, we're going to define self-employment, talk about how to calculate net self-employment income for U.S. self-employment tax purposes, illustrate how residents of U.S. territories report self-employment tax. And to do that, we're going to go over some examples. And then we're going to discuss the penalties that may apply for failing to report and pay self-employment tax in a timely manner.

U.S. territories have separate autonomous income tax systems. But they do not have their own systems for social security. We all participate in the same social security system, those of us here on the mainland, if you will, and those in the territories. And the IRS is the one responsible for ensuring that self-employed individuals who live and work in the U.S. territories, and by U.S. territories, we're referring to American Samoa, Guam, Puerto Rico, the Commonwealth of Northern Mariana Islands, and the U.S. Virgin Islands.

So, the IRS is responsible for ensuring that self-employed individuals in those territories comply with the requirements for paying self-employment tax. What that means is that if you live and work in a U.S. territory and you have net earnings from self-employment that total $400 or more, then you generally must report and pay self-employment tax to the IRS. It's important to keep in mind that you do not report your self-employment tax or submit your self-employment tax payments to the territory. Instead, those are to go to the IRS.

Now, this requirement, report and pay self-employment tax, applies regardless of whether you're required to file an income tax return with the IRS. The only exception is if you're a non-resident of the United States and you're also not a resident of American Samoa, Guam, Puerto Rico, the Commonwealth Of Northern Mariana Islands, or the U.S. Virgin Islands.

Now, employees have taxes withheld from their paychecks by their employer. So there isn't much to think about usually when you're an employee because it's kind of automatic. So, if in the past you had worked as an employee, you might not have really thought about the Social Security and Medicare taxes that get withheld from your pay. But as a self-employed individual, you're required to pay those taxes yourself to the IRS. Which form you file with the IRS to report and pay your self-employment tax depends on whether you're required to file a U.S. income tax return.

If you are not required to file a U.S. income tax return, then you're going to want to file Form 1040-SS, U.S. self-employment tax return with the IRS. And you attach the Schedule SE to that, which is where you compute the self-employment tax. And you also attach is Schedule C, which shows how you arrived at your net self-employment income. If you're required to file a U.S. income tax return, then you attach Schedule SE to your U.S. income tax return.

Now, some of you might be wondering how to determine whether you have a requirement to file a U.S. income tax return. And that is kind of beyond the scope of this webinar. It depends on a variety of factors, including whether you are a bona fide resident of a U.S. territory under the rules set forth in Internal Revenue Code Section 937. And if so, which territory you're a resident of, because the rules for the income tax vary depending on the territory. Also depends on whether you're a U.S. citizen, a U.S. resident, or neither. Whether you have income from sources outside the territory. And whether you receive income for services as an employee of the U.S. government.

And again, unfortunately, we don't have time to discuss the specific income tax filing requirements for individuals with income sourced within a U.S. territory during this webinar, because our emphasis here today is on self-employment tax. If you need more information on the topic of income tax, you can refer to IRS Publication 570. And the name of that publication, which will be listed later in this deck, you'll see it on one of the last slides in the deck. But the title of that Publication 570 is Tax Guides for Individuals with Income from U.S. Territories. Or you could contact your specific territory's tax department.

Okay, now let's move on to talk about individuals who are self-employed. So who is self-employed? Well, you're self-employed if you're a sole proprietor, which includes an independent contractor. You're self-employed if you're the sole member of a limited liability company or LLC that is disregarded for federal, meaning U.S. income tax purposes. Or if you are a member of a qualified joint venture, you'd also be self-employed. If you're a partner in a partnership, that constitutes self-employment as well. Or a member of a multi-member LLC, meaning limited liability company that is formed in the territory and did not file Form 8832 Entity Classification Election, choosing to be treated as a foreign corporation for U.S. tax purposes. Or if you're otherwise engaged in business in a capacity other than that of an employee.

Now please keep in mind that you don't have to be carrying on regular full time business activities to be self-employed. Individuals may have a part time business in addition to their regular job, or do some work on the side as an independent contractor, or it could be that you operate a seasonal business and all of those situations constitute self-employment.

Later in this presentation, we're going to go over four examples to show you how self-employment tax is reported. And the examples that we will cover in the presentation later include the following fictional scenarios. One of them is an individual who works at a bank and has a side job in the sharing economy. And when we use the term sharing economy, we're talking about someone who uses one of the many online platforms that are available to provide car rides or to connect and provide a number of other goods or services. And I don't know about you, but as time goes on, I find myself using those more and more. Whether it's to get a ride or to ask that some lunch be delivered or something, right? So there are a number of online applications. We refer to those as sharing economy.

Someone who's a computer programmer by day and repairs computers on the side. Someone who operates two businesses as a sole proprietor. They have a restaurant and a farm. And an individual who's a Self-Employed Attorney. So those are the four examples that we're going to go over later on and we'll illustrate how each one would report their self-employment tax. But first, Kathy is going to define net self-employment income and explain how to compute self-employment tax. Kathy?

Thank you, Bethany. So net self-employment income includes the following. So gross income, and that includes any tips that you may have received from a trade or business less the allowable deductions attributable to that trade or business. It includes a general partner's distributive share, whether or not it is distributed, the share of income or loss from any trade or business carried on by a partnership and that excludes rental, dividends, interest, and capital gain or losses.

It includes payments received by a partner of a partnership for services rendered to the partnership such as guaranteed payments. Now flow through income from another tax transparent entity such as an LLC formed in a U.S. territory, unless the entity filed Form 8832 entity classification election, electing to be treated as a foreign corporation for federal tax purposes. So what is, we're continuing to talk about what is self-employment income. So that would also be fees for services that you provide as a notary public.

These fees are not subject to self-employment tax. However, all of your other self-employment income is subject to self-employment tax. So here on the slide, we have an example. So Elle is a Self-Employed Attorney and he is also a notary public. So only the income that Elle received for services performed as a notary is not subject to self-employment tax. And later in today's presentation, Bethany will walk you through how such an individual would calculate and report their net self-employment income. So the U.S. territories of Guam and Puerto Rico are community property jurisdictions. And if an individual and his or her spouse wholly own an unincorporated business as community property and only one spouse participates in the business, all of the income from that business is the self-employment income of that spouse.

But if both spouses participate, then the income and deductions are allocated to each spouse based on their respective distributive shares. So what does and does not constitute self-employment income is discussed in greater depth in the instructions for Schedule SE, the self-employment tax, which gets attached to Form 1040 SS, or if there is a U.S. filing requirement to Form 1040. Christopher, I think this is a great time to stop for our next polling question.

I totally agree, Kathy. Audience, let's get excited about our second polling question. It reads, a Self-Employed Attorney who receives fees for both legal services and notary public services is subject to self-employment tax on A, fees for legal services only, B, fees for both legal services and notary public services, or C, fees for notary public services only.

Based on the information just shared, take a minute and click the radio button you believe most closely answers this question or submit only the letters A, B, or C in the ask question text box if you do not receive the polling question. Your response is timestamped. So I'll give you a few seconds to make your selection now. Okay, audience, we're going to go ahead and stop the polling now, and we'll share the correct answer on the next slide. And the correct response is A, fees for legal services only. Let's go ahead and see how you all responded with this polling question.

Oh, I see that we have responded with 61% choosing A. Looks like A is that right there? Looks like A, which is not so great. I'm going to go ahead and ask that Kathy, can you give us a little bit of explanation so that we can answer this one?

Sure, Chris. So there are special rules which we'll go over a little bit later, when Bethany talks about the examples for a notary public. And the fees for the legal services are of course, included in the calculation for self-employment tax, but the fees for notary public services are not included. So, again, we'll go over that a little bit later.

Yes, yes. Thank you for that explanation. Hopefully, we'll get the next polling question, do a little bit better on that one. So, I'm going to go ahead and send the mic back over to you to continue.

Okay. Thank you, Christopher. So net self-employment income is generally computed the same way for territory income tax purposes as for U.S. self-employment tax purposes. You'll refer to the instructions to Schedule SE, as we mentioned before for self-employment tax for more information about the expenses that are allowed in determining net income from self-employment for U.S. self-employment tax purposes. So some operating expenses that may be deductible on returns filed with Puerto Rico's tax agency, they may not be allowable in computing net income for U.S. self-employment tax purposes.

For example, the Puerto Rico return may allow the deduction of one half of self-employment tax, the self-employed health insurance and contributions to Simplified Employee Pensions or SEP plans as business operating expenses. And although these expenses are allowed as adjustments to gross income on Form 1040, they are not deductible when computing the net self-employment income on Schedule C or F of the U.S. Form 1040. So again, please refer to the instructions for Form 1040-SS and Schedule SE for more information.

So self-employed individuals may be liable for additional Medicare tax for self-employment income, which exceeds the threshold amount for each taxable year, which is as shown on the Form 8959. And you can get more information on that again from the instructions for that form. So if you are required to pay additional Medicare tax on your self-employment income, you'll attach Form 8959 to Form 1040-SS or Form 1040 as applicable. And please note, you cannot include the additional Medicare Tax as part of your deduction of the half self-employment tax on Form 1040. Now your payments of self-employment tax contribute to your coverage under the U.S. Social Security System.

And the Social Security coverage provides you with old age, survivor, and disability benefits, as well as hospital insurance. So the Social Security Administration uses information from the Form 1040-SS to compute your benefits under the Social Security Program. So I know that we keep saying this, but it is important. So if you have self-employment income and you're subject to self-employment tax, you must file and send your self-employment tax payments to the IRS.

So if you have any U.S. source income such as social security benefits, please see Publication 570, the tax guide for individuals with income from U.S. territories and Publication 1321, the special instructions for bonafide residents of Puerto Rico who must file a U.S. income tax return, which is Form 1040. So both of these publications have great information about reporting your self-employment tax. So if you are required to file Form 1040 with the Internal Revenue Service, you will attach Schedule SE and submit it to the IRS with your Form 1040. Otherwise, the Form 1040-SS with Schedule SE attached with the IRS at the address shown in the instructions. Do not submit your self-employment tax form, so the Form 1040-SS do not submit that or your self-employment tax payments to your local U.S. territory tax agency. Those go to the Internal Revenue Service. And Christopher, I think we're ready for another polling question.

Perfect timing. Now, audience, are you ready for our third polling question? Let's go. Based on the information that was just shared, who do you file your self-employment tax forms with? Do you think the correct answer is A, your local U.S. territory tax agency or B, the Internal Revenue Service. Now this one's a bit tricky, so take your time and click on the radio button you believe answers this question.

Your response is timestamped, so use the radio button or submit only the letter A or B in the ask question text box. I'll give you a few seconds to make your selection, so take your time. You got this. All right folks. Hopefully you got your answers in. We're going to stop the polling now and share the correct answer on the next slide. And there you have it. The correct response is B, the Internal Revenue Service.

Let's see how you all have done. I am seeing that 95% of you responded correctly to this. This is fantastic. I'm rooting for you all here. So now I'm going to go ahead and turn it over to Bethany to go over some examples. So, Bethany, the mic is all yours.

Well, thank you, Chris. Okay. Now that we've defined self-employment income and explained how to compute self-employment tax, let's look at some examples that illustrate this. Okay. This first example has to do with an individual who has a full time job with a bank. In the evenings and on their days off, this person provides rides to customers arranged through a rideshare app. And that rideshare company that runs this app, of course, receives the payments from the customers. And then they deduct a service fee and pay the driver a specified share of that ride payment. Now, most customers add the tip to their credit card payment there in the app.

But once in a while, they like to give a cash tip. So this individual does occasionally receive cash tips from their customers. During 2025, they received rideshare payments after service fees were deducted that totaled $8,600, so a net of $8,600 They also received cash tips that totaled $200. Their deductible business expenses were $3,700. So, as we can see here, they must pay U.S. self-employment tax on a net profit of $5,100. They complete their Schedule SE, as shown here on the screen, and attach that to the Form 1040 SS to report their net self-employment income of $5,100. They take that self-employment income amount of $5,100 net self-employment income and they multiply it by 92.35%. And when we do that, the result is $4,710 after rounding. This person's earnings from their day job at the bank are $37,000. They subtract that from 176,100 which is the maximum amount of earnings on which Social Security could be withheld for tax year 2025. And the result is $139,100. And that goes on Line 9.

Next, they're going to take the lesser of that $4,710 on Line 6, or the $139,100 on Line 9, which obviously the lesser of the two numbers is going to be the $4,710 on Line 6, right? They're going to multiply that by 12.4%. And that'll result in Social Security tax of $584 which goes on Line 10. Then, that $4,710 gets multiplied by 2.9%, which gives us $137 in Medicare tax. And that goes on Line 11. So, we add these two numbers together, the $584 and the $137 and this person's self-employment tax totaled $721 which we see here on Line 12.

From there, it gets carried over to Line 3 of the 1040 SS. And they would then complete the rest of that Form 1040 SS, attach the Schedule SE, and send all that to the IRS. And you might wonder why you don't see it completed on there. That's because this is just a small example and there could be, as you can see from the other lines on there, there could be a lot of other things going on that they need to also include on there. But in this limited example, we're just sticking with what we do know.

Okay. Now, let's look at another example. Here we have an individual who works full time as a computer programmer for a software company. And they make $180,000 a year doing that. Their employer withholds employment taxes on that income. So they don't have to worry about that. But on occasion, this person also engages in repairing computers and installing software for other customers as a side business.

In 2025, they made $8,000 in gross receipts from this side business. They also had deductible business expenses of $1,600 for supplies and software directly related to this side business. So their 2025 net profit from the side business is $6,400. They must file Form 1040 SS with the IRS attaching Schedule SE to report this self-employment income and pay self-employment tax.

They would report net self-employment income on Line 2 and then compute self-employment tax by first taking the net self-employment income of $6,400 and multiplying it by 92.35%. And the result, as we can see here, is $5,910. As I mentioned earlier, this person made $180,000 as an employee, and their employer withheld Social Security and Medicare taxes from that. Since $176,100 is the maximum amount of earnings on which Social Security Tax could be withheld in 2025, they don't have to pay any further Social Security tax on the additional self-employment income.

There is no cap or limit, however, on how much an individual must pay for Medicare. So on Line 11, we multiply the 5,910 by 2.9%, which gives us $171 in Medicare tax, as shown here on Line 12. And that amount then goes over to Line 3 of the 1040 SS. Now, I saw a question in the questions. I saw a question about why would a person who filed a return with their territory be filing another return with us, the 1040 SS? And that's because we are the ones who are responsible for collecting that. So the 1040 SS does get filed with the IRS.

Now, another thing I noticed in the questions is there are some questions coming in about self-employment tax that are having to do with people abroad or in foreign countries. This webinar is extremely limited to the territories. So that's what we're talking about in this webinar. And so I apologize that we probably won't have time to answer questions about self-employment tax for people who are living and working in other countries.

Very briefly, I will state because it is a topic that I am somewhat familiar with, that if you live and work in a foreign country and you're a U.S. citizen or resident, you pay. And, of course, you wouldn't be a resident very easily unless it was with a green card, right? Because under the Substantial Presence Test, you'd have to be here a certain amount of time to be that. But U.S. individuals do pay self-employment tax on self-employment income, no matter where in the world they're making that self-employment income. So, that's just something to keep in mind, and I'll give you that brief tidbit on it to try to answer, to some degree, some of the questions that might have been coming in about that.

But right now, we're talking and limiting this webinar to the territories. So again, they would put this on the Line 3 of the 1040 SS and attach the Schedule SE to that. And then submit that to the IRS. And if you have business expenses that you needed to show, it's highly recommended. You should fill out and actually, you should. That's in the instructions. Fill out the Schedule C.

Now, some years ago, the 1040 SS had additional parts to it that it no longer has. That is why now the 1040 SS refers you to the IRS Form 1040 Schedule C to be attached. So sometimes you'll have the 1040 SS. Let's say someone gives me a 1099 miscellaneous for something real simple where I had no expenses, right? So I got $1,000, and I had no expenses. Well, that one's easy. I'm just going to fill out the SC and attach it to the SF. So I'll fill out a 1040 Schedule SE and attach that to the 1040 SF.

But let's say I have a more complicated business and I have expenses, several different varieties of expenses, then I'm going to want to fill out a form, a U.S. 10 Form 1040, Schedule C, strictly for purposes of attaching it to this 1040 SS. So in that case, I'll have the 1040 SS, behind that the Schedule SE, and behind that the Schedule C, okay? And I just want to clarify that.

Kathy, I think you're going to go through our next example. Thank you.

Yep, that's right, Bethany. So for this example, it involves a sole proprietor and he has two businesses. So they own and operate both a restaurant and they also have a farm. So in 2025, their restaurant business had gross receipts of 150,000, and then they also had business expenses of 78,000. So the farm had gross receipts of $5,000 and $6,000 of business expenses. So as you can see in the first column here, the restaurant business brought in a $150,000 in gross income. And since the expenses were $78,000, it resulted in a net profit of $72,000. So the farming business, didn't do so well this year.

In 2025, the farm, which in the past had always been profitable, so it brought in $5,000 and the expenses were $6,000, so it yielded a net loss of $1,000. So since this person has more than one business, they must combine the net profit or loss from both businesses to determine their total earnings that are subject to self-employment tax. So the loss from the farming business reduces the profit from the restaurant business for self-employment tax purposes. So their net business income that is subject to self-employment tax is $71,000 and we get that by taking the $72,000 net profit from the restaurant less the $1000 net loss from the farm.

So even though there are two businesses, they will only file one Form 1040 SS to report income from self-employment tax to the IRS after figuring the correct amount of self-employment tax on Schedule SE. Now let's look how the amount of self-employment tax is computed. So on Line 1a, we put the net farm profit or loss, and they report the $1000 loss from the farming business. Then Line 1a is only used for farms, so the profit from the restaurant business is not shown on this line.

Then on Line 2, that's used to report net profit or loss from non-farm businesses. So this is the line where they report the $72,000 profit from the restaurant business. So combining the $1000 loss from the farming business Line 1a and the $72,000 profit from the restaurant business Line 2, that makes for a total of $71,000 which is entered on Line 3 of the form.

So next, the net self-employment income of 71,000 is multiplied by the 92.35% or 0.9235, and the result is $65,569, which is reported on Line 4a. So this amount is then carried to Line 4c. And since this person was not eligible to elect and they did not elect to use an optional method to figure self-employment tax. Please note that we do not have time to discuss the optional methods for figuring self-employment tax today. And if you need information about the optional methods, please see the instructions to Schedule SE.

Okay. So continuing with the Schedule SE. Since Lines 5a and b do not apply, then the $65,569 from Line 4c is brought down to Line 6, and Lines 8a through c also do not apply. So Line 8d is zero, and the $65,569 is brought down to Line 9. So next, the lesser of Line 6 or Line 9. In this case, both amounts are the same. So $65,569 is multiplied by 12.4%, which results in social security tax of $8,131 on Line 10. And then multiplying the $65,569 by 2.9%, that equals 1,901. We put that on Line 11. So SS self-employment tax totals $10,032 as shown here on Line 12. And that amount then goes on Line 3 of the Form 1040 SS.

Okay, so now Bethany, can you take us through our last example?

Yes, certainly. In this example, we have a self-employed attorney who provides both legal and notary services. In 2025, they received $95,000 for legal services and another $5,000 for notary services. They reported a total of $17,000 in business expenses on their territory income tax return, which included $300 of expenses related to the notary income, and it included $7,000 for their health insurance.

You can see that the first column here on the slide kind of recaps what we just talked about. The second column shows how we arrived at what should be reported as net self-employment income on the Form 1040 SS and Schedule SE. And I want to point out that although the $7,000 that this individual paid for their health insurance was included in their business expenses on Territory tax return, and that was correctly done that way because their Territory allows that. This expense is not deductible when they're computing net self-employment income for purposes of U.S. self-employment tax. So, the rules could be different between what the territory lets do for your income tax purposes on their return, and what the IRS allows for self-employment tax purposes on the 1040 SS SE and Schedule C.

Okay, as I mentioned on the previous slide, the $10,000 of business expenses had included $300 related to that income that they got for notary services. So, the net income from notary services was $4,700. Now, interestingly, self-employment tax is not imposed on net income from notary services. So that $4,700 in net income from the notary services has to be backed out for purposes of U.S. self-employment tax, which brings the amount subject to U.S. self-employment tax here to $85,300. The individual must use Schedule SE and Form 1040-SS to figure and report the net profit to the IRS and figure the correct amount of self-employment tax.

So, let's look at how that amount is computed. First, we enter the $90,000 of net self-employment income on Line 2. Then on Line 3, per the instructions for this form, we back out the $4,700 of net income from notary services, which as you recall, was the $5,000 in notary income minus the $300 of expenses related to that notary income. And we write there on that dotted line exempt notary $4,700. Writing that on the dotted line next to Line 3. Then we enter $85,300 as net income from self-employment.

And we multiply that by 92.35% for an amount of $78,775. Now, $78,775 is less than $176,100 it gets multiplied by 12.4% for $9,768 in Social Security Tax. And following the form, we then multiply the $78,775 by 2.9%, which gives us $2,284 in Medicare Tax. And as you can see here, the total self-employment tax that they have to pay is $12,052 which gets carried from Line 12 of the Schedule SE over to Line 3 of the Form 1040-SS. Okay, now that we've gone over how to complete these forms, let's talk about when they're due. Kathy?

Okay. So Form 1040-SS is due by the 15th day of the fourth month after the close of the taxable year. So the same as our 1040 returns. So for calendar year taxpayers, this is generally April 15th. So all payments must be made on or before the due date. So to request an automatic six month extension of the time to file, you would file Form 4868 and it must be filed on or before this due date.

So please note that this is an extension of time to file, not time to pay. So payments must be timely to avoid the penalties and interest that we're going to be going over. So Christopher, do you think this might be a good time for us to ask our next polling question?

Oh, yes. Now's a great time for a polling question. And, might I add, there was a lot of good information in this section. Audience, eyes and ears up, let's get into our fourth polling question. It's a true false one. So, here we go. Filing Form 4868 to extend the due date for filing Form 1040-SS or Form 1040-PR also extends the payment due date. Please take a minute and click on the radio button you believe most closely answers this question based on the information that was just shared.

Do you think the answer is A, true or B, false? While you're thinking about it, let me remind you that your responses are timestamped. So please click the radio button or submit only the letter A, or B in the ask question text box. Take a moment, review the question and make your selection now.

All right, audience. Okay, we're going to go ahead and stop the polling and we'll share the correct answer on the next slide. Okay. So let's see. Hopefully, you guessed it right. The correct response is actually B, false. Filing Form 4868 to extend the due date for filing Form 1040-SS does not extend the payment due date. Okay. And let's see how you actually responded here, audience. I see that 93% of you responded correctly. All right. That's a great correct response rate, folks. Let's keep the ball rolling. Kathy, I'll swing the microphone back to you.

Thank you, Christopher. Okay. So individuals who expect to owe self-employment tax of $1,000 or more should make estimated tax payments using Form 1040-ES, estimated tax for individuals. So we've already talked about the benefits of paying self-employment taxes, which is that you want to receive credit for Social Security purposes. So we want to emphasize the importance of paying these taxes on time.

So generally the Social Security Administration, they will give credit only for self-employment income reported on a tax return that is filed within three years, three months, and 15 days after the year in which the income was earned. So in order for you to receive credit for purposes of calculating your future social security benefits, payments must be received no later than three years, three months, and 15 days after the year for which they apply.

So for example, if, payments for 2022 Self-employment tax received after April 15, 2026 will not be credited to your account for purposes of calculating your future social security benefits. So get them paid timely. So it's also important to pay your self-employment taxes on time so that you can avoid penalties and interest.

So if you do not properly and timely report and pay self-employment tax, you may be subject to the following. There's an estimated tax penalty, a failure to file penalty, failure to pay penalty, accuracy related penalties, civil fraud penalty, fraudulent failure to file penalty, and interest might apply. So the United States income tax system is a pay as you go tax system. So this means that you must pay income tax as you earn or receive your income during the year. So if you didn't pay enough tax throughout the year, then you may have to pay a penalty for underpayment of estimated tax.

So generally you can avoid this penalty if you either owe less than $1,000 in tax after subtracting any withholding and estimated tax payments that you made during the year, or if you paid at least 90% of the tax for the current year or a 100% of the tax that is shown on the return for the prior year, whichever is smaller.

So the IRS calculates the penalty separately for each required installment. So the number of days late is first determined and then multiplied by the effective interest rate for the installment period. So the authority for the penalty for failure to pay proper estimated tax is Internal Revenue Code Section 6654. And you're going to use Form 2210, under payment of estimated tax by individuals, estates, and trusts to see if you owe a penalty for underpaying your estimated tax.

So for more information, you can also refer to Publication 505, and that's tax withholding and estimated tax. So if you owe tax and you don't file on time, there's a penalty for not filing on time. And the failure to file penalty is usually 5% of the unpaid tax that is required to be reported and is charged for each month or part of a month that your return is late, up to five months. So the maximum failure to file penalty is going to be 25% of the unpaid tax, and that's 5% times those first five months. So if your return is over 60 days late, there's also a minimum penalty for late filing.

So it is the lesser of two amounts, and that is a 100% of the tax required to be shown on the return that you didn't pay on time or a specific dollar amount that is adjusted annually for inflation, which for tax years between January 1^st, 2024 and December 31, 2024, that amount was $485. And the specific dollar amount was adjusted to $510 for returns due between January 1, 2025 and December 31, 2025 and for 2026, that amount was increased to $525.

So the authority for the failure to file penalty is in Internal Revenue Code Section 6651(a)(1) within this mandates that a penalty be assessed when a return is filed late and the tax due was not paid by the return due date. So if you can't file on time, request an extension either electronically or on a paper Form 4868, application for automatic extension of time to file U.S. individual tax return.

So if you can't file on time, make sure you request that extension. So in addition to the estimated tax penalty, there is another penalty for not paying on time. So the failure to pay penalty accrues from the due date of the return until the tax is paid in full. So the failure to pay penalty is one half of 1% for each month or part of the month up to a maximum of 25% of the tax that remains unpaid. So if you cannot pay, it's best to file on time and request an installment agreement.

So if you file your Form 1040-SS by the due date and you request an installment agreement, then the one half of 1% rates for failure to pay penalty that decreases to one quarter of 1% for any month in which an installment agreement is in effect. So, the two most common accuracy related penalties, they are the substantial understatement penalty and the negligence or disregard of the rules and regulations penalty. So these penalties are calculated as a flat 20% of the net understatement of tax. So an understatement is substantial if it is more than the greater of either 10% of the correct tax or $5,000. So negligence includes, but is not limited to, any failure to make a reasonable attempt to comply with the Internal Revenue Laws or exercise ordinary and reasonable care in preparation of a tax return. So the next penalty that we're going to talk about is the civil fraud penalty.

And this penalty applies if there is any underpayment of tax on your return due to fraud. So if the civil fraud penalty applies, it's 75% of the underpayment due to fraud, and it will be added to your tax. And the authority for the civil fraud penalty is IRC Section 6663 and the IRS bears the burden of proving civil fraud by clear and convincing evidence. Now the fraudulent failure to file penalty applies if the failure to file a return is fraudulent.

So the authority for the fraudulent failure to file penalty is set forth in IRC Section 6651(f). And fraudulent failure to file increases the failure to file penalty, which we discussed earlier to a rate of 15% of the tax owed for each month or part of the month that your return is late up to a maximum of 75%. Okay. Now that we've covered the penalties that may apply, Bethany will discuss the interest.

Okay. Thank you, Kathy. I'm busy looking at all the questions that are coming in, so I'm sorry if I'm a little caught off guard here. Lots of good questions and hoping we can get to them and hoping we can get to most of them. But I don't know. The time is limited. Okay. Interest accrues generally on any unpaid tax from the due date of the return until the date you pay it in full. And the interest is determined quarterly, and the rate they use is the federal short term rate with an additional 3%. And the interest compounds on a daily basis.

Okay, Chris, I think we might have time for one more polling question.

Are we really at the end already, Bethany? Well, then it's time to get fired up for our Fifth and Final Polling Question, folks. Let's drive this hot ride home. This one's another true or false one. Based on the information just shared to us, interest on unpaid tax compounds daily and accrues from the due date of the return until paid in full. Do you think the correct answer is A, true, or B, false?

And again, please take a minute and click on the radio button you believe answers this question. Your response is timestamped, so use the radio button or submit only the letter A or B in the ask question text box. I'll give you some time to answer this one. And all right, that's time. We're now going to stop the polling and of course, share the correct answer on the next slide here.

And the correct response is A. A, true. Interest on unpaid tax compounds daily and accrues from the due date of the return until paid in full. And truly, I'm astounded folks. You turned it around. You've been wonderful today. I can see that 95% of you chose the correct answer here. So this is fantastic.

Bethany, go ahead and take it away for us.

Okay. Thank you, Chris. There are a few other situations, and some of these were mentioned in some of the questions that were coming in. There are a few other situations. Someone had asked, is this the only time you file a 1040 SS? Is it only 1040 SS? Would it only be for this self-employment income from a territory? And the answer is that there are other situations that could cause someone to have to file a 1040 SS.

And so an individual is required to pay the employee portion of Social Security and Medicare Tax on unreported tips, wages from an employer with no Social Security or Medicare Tax withheld and/or uncollected Social Security and Medicare Tax on tips or group life insurance. If any of these apply to you, or you think they do, then please look at the instructions for the 1040 SS for further details. I know there's also some wondering about the fact that currently there are some no tax on tips, things going on.

And so I would recommend, that's a little beyond the scope of this particular, we didn't think about that too much. So I would look at the 1040 SS instructions for further details on that and the 1040 SE with all the Schedule SE instructions as well. Okay. You'd also have to file the 1040 SS if you owe additional Medicare tax or to report and pay household employment taxes. Meaning to pay Social Security and Medicare taxes on behalf of any household employee that you have.

For example, if you hire someone to care for your children in your home or to clean your house, you would use the 1040 SS to report and pay Social Security and Medicare taxes on behalf of that person. Okay, we covered a lot of ground today. And listed here on this slide are some resources that might be helpful.

Chris, that concludes our presentation. I'll turn it back over to you now for the Q&A.

Absolutely. And a special thank you to Bethany and Kathy. You did an amazing job with this presentation. Audience, we have made it to the fun part, our live Q&A session. It's about to begin. I'll be monitoring this session, but before we start, I want to thank everyone for attending and staying engaged during today's presentation titled U.S. Territories - Self-Employment Tax.

If you have not input your questions, there's still time to do so. Go ahead and click on the drop down arrow next to the ask question field. Type in your question and click send. Okay? Bethany and Kathy are staying on with us and will be answering your questions.

Now, one quick note before we get started. We may not have time to answer every question submitted during today's session, but we'll do the best that we can to address as many as time allows. So, let's just jump right on in. An attendee writes, I have flow through income from a Puerto Rico limited liability company. Do I owe self-employment tax on that flow through income?

Okay. The answer is yes. You do, unless the entity filed a Form 8832 with the Internal Revenue Service electing to be treated as a foreign corporation for U.S. tax purposes.

Very good. Very good. Another attendee writes here, as a self-employed sole proprietor, which forms do I need to submit to the IRS when reporting my self-employment tax? And where can I find those forms?

Okay. So you'll need to submit Form 1040 SS, and you'll attach a Schedule SE to show how you computed your self-employment tax. If you have any business expenses, you'll also need to attach a Schedule C to show how you computed your net profit. And then those forms can be found on IRS.gov.

Perfect. Perfect. Here's another. I do not claim any expenses on my Puerto Rico return, because I'm eligible for and use the optional method. So how do I go about filing Form 1040 SS?

Oh, I'm sorry. I think that was my question. I'm looking at the questions again. Okay. If you're using the optional method to report your income to Puerto Rico, and therefore you don't have any business expenses on your SEN to return, you'll still need to complete and attach the Schedules C and SE to your Form 1040 SS before sending it to the IRS. So that's where you would notate those.

Thank you for that. Thank you for that. And trust me, I get it. There's a lot of correspondence going back and forth with the questions here. So thank you, guys. Thank you participants, attendees for asking here. I see another one, another question here. My self-employment income is exempt from territory taxation under the terms of a decree. Do I still have to report and pay self-employment tax to the IRS on that income?

I'll take that one, Chris. Okay. So, yes, you will need to submit Form 1040 SS. And again, you'll attach the Schedule SE to show how you computed your self-employment tax. If you have any business expenses, then yes, you'll also need to attach Schedule C to show how you computed your net profit.

Wonderful. Let's keep the ball rolling here. Is the self-employment tax only on Schedule C, not E or F for U.S. territories?

I'll take that one too, Chris. So it's not just for Schedule C, so that also would include your F. And then your -- if it's includes your flow through income, that would also be on Schedule E. So it can be Schedule E, C, and F for U.S. territories.

Perfect. I love this question. It's kind of like a statement and a question. It says, what? How could you need to file self-employment but not a tax return? I'm waiting patiently on the answer.

Okay. So the reason that there may not be a tax return due is that there are, as we said, varying rules around how you pay income tax in the territories. So in some instances, you don't need to file a return with the IRS. So, I guess I'll do this very, very briefly, and it's very generic. But if you're a bona fide resident of a U.S. territory under code Section 937, regardless of whether you are a U.S. person or a non-resident alien for U.S. tax purposes, okay?

So regardless of whether or not you are a resident of the U.S., regardless of whether you're a citizen or resident of the U.S., if you're a bona fide resident of a territory, you report your worldwide income. If you're in American Samoa, you report it to American Samoa. If you have income from sources outside of American Samoa, you'll file a U.S. 1040 reporting your worldwide income, including the income from American Samoa and everywhere else. And then you exclude income from sources in American Samoa other than amounts received for services as an employee of the U.S. government.

Okay. If you're the same kind of person, bona fide resident of a territory. So if you're a bona fide resident of Puerto Rico, regardless under code section, IRS code section, Internal Revenue Code Section 937, regardless of whether you're a resident, citizen, or non-resident of the U.S. doesn't matter. If you are a bona fide resident of Puerto Rico, under Code Section 937, you report your worldwide income to Puerto Rico. If you have income from sources outside Puerto Rico, then you file a U.S. 1040 reporting worldwide income.

Well said.

And experience from sources in Puerto Rico other than amounts received for services as an employee of the U.S. government. I'm sorry. Were you saying something, Chris?

Oh, this is great information. I was saying well said. Thank you for that. If you'd be have more.

Thank you. Yeah. There's more. Well, there's more. I'm sorry. It's going to take a while. It's kind of long, but I see quite a few questions around it. So I guess I'll go ahead and take the time, and I hope folks don't mind. If you're a bona fide resident, again, under Internal Revenue Code Section 937 of Commonwealth of Northern Mariana Islands, you report your worldwide income to Commonwealth of Northern Mariana Islands. No separate U.S. filing requirement, okay?

Now this is for income taxes. The same is true for Guam and the U.S. Virgin Islands. So we have two territories that are similar, American Samoa and Puerto Rico. And then we have three others that have a different rule as far as the interplay between whether who they report to. And that's Commonwealth of Northern Mariana Islands, Guam, and the U.S. Virgin Islands. If you're a resident of one of those three territories, you report your worldwide income to that territory. And I'm talking about Northern Mariana Islands, Guam, or the U.S. Virgin Islands. And you don't have a separate U.S. income tax filing requirement.

Okay. If you're an individual who is not a bona fide resident of a U.S. territory, and you are a U.S. citizen or resident with income from the territory, then again, it's kind of split. There's two territories, American Samoa and Puerto Rico with a similar rule. So if you're not a bona fide resident of a U.S. territory, but you are a U.S. citizen or a U.S. resident, and you have income from that territory, you report to American Samoa only the income from American Samoa, and you file a U.S. 1040 reporting your worldwide income. And you can claim on that U.S. 1040 a credit for the taxes you paid to American Samoa on the American Samoan income. This is for the individual who's not a bona fide resident.

If you're not a bona fide resident of Puerto Rico, but you are a U.S. individual, then you report to Puerto Rico only the income from Puerto Rico. You file a U.S. 1040 reporting worldwide income, and you claim a credit for the taxes you paid to Puerto Rico on the Puerto Rico source income. If you are a U.S. citizen or a resident, again, who is not a bona fide resident of Northern Mariana Islands, Guam, or the USVI, you file only a U.S. Form 1040 reporting your worldwide income, and you don't have a separate requirement if it's Northern Mariana or Guam. But if it's USVI, you have to file an identical copy of what you file with us with the USVI.

And finally, what if you are not a bona fide resident and of a U.S. territory, and you are not a resident of the United States and you have income from the territory. Then you report to that territory your income from that territory, and you file a 1040 NR with the U.S. to report any U.S. sourced income. And that the rule is the same for all five territories on that last one. So, I know that was complex, and I know it was long. But I hope, if you were wondering, you found yourself somewhere in that information, and were able to say, oh, okay, that sounds like me, and that's what I need to do. It was kind of beyond the scope of the webinar, but I went ahead and veered from that anyway and did it. I'm sorry, but thank you, Chris.

Yes, we really appreciate that. That was a wonderful explanation. I know the audience really appreciates you explaining that for them. It's going to help everyone out. So thank you for that. Continuing on, if a taxpayer, a TP is required to pay U.S. self-employment tax, one would think that a tax return would be required. Can you provide some examples of when the self-employment tax is required, but not the filing of a tax return?

Okay. I think I'll take that one. It ties right into what I was just talking about, right? Because the rules I just discussed had to do with income tax. And you could see that there were instances, a number of them, where you're not going to be filing a return with the United States, right? But you can income tax return. But you still have to file a self-employment tax return for the income that you made in the territory. So those would be instances, the ones that we just discussed, where you are filing a return with the territory and not with the U.S. Again, depending on whether or not you're a bonafide resident, which territory it is, et cetera, right?

So, yes, there are. That answers that question. I also see a question similar to that. Is the self-employment tax only on Schedule C, not E or F? Well, it could be. It could be on a Schedule C or Schedule F. And so if you have self-employment income, you're going to need to fill out the proper form and put that with the 1040-SS. If you do, and based on what we just went over, some people do have to file a U.S. income tax return. And if you do, then you can put it on the Schedule SE that's attached to the 1040. So if you need to file a U.S. 1040, go ahead and put it on the Schedule SE.

But for those who don't have to file a 1040, they use the 1040-SS. If they don't have to file an income tax return with the IRS, they still file the self-employment return, which is the SS. Okay.

Very good. Very good. I know you mentioned those schedules there. I see the attendee actually asked question. Are there some instances when a partner of a partnership's earnings are not subject to self-employment tax?

Okay. I'll take that one. So generally, income for a limited partner, and you all know when we say generally, that means there may be some exceptions out there. But for the most part, limited partner income is not subject to SE tax unless the limited partner receives guaranteed payments. Guaranteed payments are always subject to SE tax.

Very good. Very good. Let's keep it going here. Attendee says, resident of U.S. Virgin Islands, received W-2 and have some self-employment. Tax return currently goes to U.S. Virgin Islands Bureau of Taxation and all income reported there. Self-employment income goes on 1040 to USVI. Does another form go to stateside IRS?

Okay, I can answer that. Yes. In this case, the 1040-SS is where you're going to put that self-employment income. So yes sir, the answer to that should be yes.

Easy does it. Let's get to the next one.

I'm sorry Chris. Because I've a whole bunch of things about the notary. The notary income, it is exempt from self-employment tax. And somebody thought that we said that it wasn't post on that. No. It's exempt from that. Somebody also wondered why we wouldn't take away the whole 5000. Well, we only take away, we only took away the net amount. Because remember, when you're doing self-employment tax, it's the net. So they figured out their net income and subtracted the net income from notary services when computing self-employment tax. I hope that helps answer that. I'm sorry. Thank you, Chris.

Sure. I see the next one that's coming in here. A little hard to understand for the attendee here. Is it self-employment gross earnings of $400 or is it net profit of $400 that requires filing even if income is less than the normal filing requirements. Example, gross of $800 but after business expenses of $650 total of all income being $7,900. I think I'm reading that right.

Okay. I'll take that one, Chris. I think I understand the question. So you have to file for self-employment taxes if your net profit is $400 or more. So that includes your gross income less any allowable expenses. So it's the net. Hopefully that answers that question.

Okay. Let's I'm going to keep going down here. I see a bunch of questions coming in. What does it mean sole member of a limited liability company LLC that's disregarded for federal income tax purposes? The disregarded part.

Okay. I'm assuming this person means that they're a single member LLC formed in The United States. And the way we look at that is that you're just a sole proprietor. We look right through it. That's my best understanding on that question. Now we do have LLCs that are formed elsewhere. Those have to file Forms 8832 to decide how they want to be treated. And usually those are multi members, but they need to file a form.

Okay. Next question. When is a hobby for gain, not self-employment income? If we can get an answer for you there.

I'm sorry. Can you repeat that question again?

Yes. I will. When is a hobby for gain not self-employment income?

Never. A hobby for gain is always self-employment income. If you are actually, if you're making a profit doing something you enjoy, it doesn't matter whether you enjoy it or not. It's self-employment income.

All right. Okay. Okay. Very good. I think we answered this before, but I'm still going to ask the question just for clarity. Maybe we did answer it, but here's what an attendee writes. If my net earnings are less than $400 but I am required to file my tax return, can I just exclude a Schedule C on the return?

I'll take that one. So you would still file a Schedule C for your business. The $400, the $400 no limit is for your social security taxes. So if you have a business and you're filing a tax return, you would still file that Schedule C.

Okey, one last one. One last one, real quick. Are Uber and Lyft drivers subject to self-employment tax? 

Yes, we don't want to name any specific companies. So let's just I get that someone did in the question, but we'll just say people that do ride shares. We had an example like that. There was an example like that in the deck. So if you're wondering, please look back at the slides. I'm assuming are they getting the slides after this is over? I don't know. But I would assume they do, right?

Yes, I assume they would as well. And with that…

I mean, the answer is yes. I mean, that's self-employment income. Unless I mean, I can't speak for specific companies. If you receive a W-2 with taxes withheld and Social Security and Medicare taxes withheld, that would be one thing. So I think that's what the determining factor is. Not so much what company you're driving for, but how it's being treated. If you are receiving a 1099 for your net income after the fees, like the example we had today, then it is self-employment income. And yes, you pay self-employment tax to the IRS on that profit.

Thank you for that clarity. I'm trying to read these questions as they're coming in folks, as you can see, but that is all the time we have for your questions today. I want to thank Bethany and Kathy for answering your questions and sharing their knowledge and expertise. Before we close the Q&A session, Bethany, what are the key points you want the attendees to remember from today's webinar?

Bethany's line is being reconnected.

Bethany is being reconnected.

Okay. I'll take over. Okay. So some of the key points. So if you live and work in a U.S. territory and you have net earnings from self-employment of $400 or more, remember that's net, you must report and pay self-employment tax even if you are not required to file an income tax return with the IRS. And if you are not required to file a U.S. income tax return, you'll still file Form 1040-SS with the IRS to report and pay your self-employment taxes.

And the next key point, so fees for notary public services are not subject to self-employment tax. However, all other self-employment income is subject to self-employment tax. And then some operating expenses that may be deductible on returns filed with territory tax agency, they may not be allowable in computing net income for U.S. self-employment tax purposes.

And then the Social Security Administration uses information from Form 1040-SS to compute your Social Security benefits. So Christopher, back to you.

Kathy, thanks for picking the ball up, and thanks for those key points. An outstanding job was done today. Audience, watch for announcements on future webinars. To register for any upcoming webinar, please visit irs.gov, keyword search webinars and select the webinars for tax practitioners or webinars for small businesses.

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